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The Great Inventory Correction

The economic downturn left tech companies with mountains of goods. Now, they're rethinking how they manage their supply chains.

Flextronics, one of the world’s largest EMS companies, with $12 billion in revenues, had an unusually good vantage point of the inventory glut. The Singapore-based company makes everything from printed circuit boards to cell phones for a variety of high-tech clients, including Cisco, Lucent, Nortel, and Ericsson. In 2000, the company’s inventories ballooned from $470 million at the beginning of the year to $1.7 billion at year’s end.

As orders poured in, Flextronics and other EMS companies could see the magnitude of the aggregated supply they were producing. Couldn’t they have warned their clients? “In general, I don’t think any of [the EMS companies] did that before,” says Pleshko. “I think that will happen going forward.”

Pleshko says Flextronics wants to obtain a better understanding with customers of consumer demand and product life cycles. Also, “we’re moving very aggressively to a supplier-managed inventory environment,” he says. The company wants to establish material hubs, where suppliers’ facilities are located close to Flextronics’s factories. “Compaq, Dell, and IBM have done this already,” says Pleshko. “The EMS guys are just coming up to speed.”

Meanwhile, there have been some disputes over the ownership of inventory in the EMS world. Some distributors have complained, for example, that they were being stuck with surplus parts. But that’s a reversal of the situation in 2000, when “everyone was looking under every rock to find parts,” says Pleshko. “When times were good, distributors were making a lot of money. They forgot.”

The Crystal Ball

Times are bad, and tech companies are still working down inventories. They await an upturn of the business cycle, a new new thing that will drive computer sales — Microsoft’s Windows XP operating system, for instance, or an unforeseen killer app — and the start in 2002 of an especially robust three-year PC replacement cycle (companies stocked up because of the year 2000 problem).

Meanwhile, two computer companies are better positioned than most to weather the downturn, thanks to superior supply chain management. One is Dell Computer. With its build-to-order business model, Dell is the lowest-cost PC maker; it never has more than a few days’ inventory on hand.

The other company is IBM. True, a third of Big Blue’s revenues come from annuity-like businesses such as services and software. And even with its diversified risk, IBM isn’t immune to the downturn. Sales were relatively flat in the second quarter ($21.6 billion), and IBM has warned that its chip sales will fall in the second half of the year. But IBM’s inventories have also remained flat. Overall, they are at their lowest level since 1988, according to Steve Ward, general manager for IBM’s Global Industrial Sector. That may owe something to old- fashioned vertical integration. Still, AMR’s O’Marah and others regard IBM’s supply chain management as among the best in the business.

Lean inventories are “absolutely critical,” says Ward. “In parts of our business, the value of components drops about 1.5 percent per month.” IBM does build some items to order, but mostly it builds fast, on a pull or just-in-time basis. “Our suppliers have visibility to how much inventory we have,” says Ward.

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